Capitalizing the Cooperative

Capitalization is the amount and source of money needed to start and operate the cooperative. The committee recommends a plan of capitalization including: (1) determine whether the capital structure is to be stock or non-stock; (2) estimate the amount of member investment (risk capital); and (3) estimate the amount and source of borrowed money needed (debt capital).

While many State incorporation statutes permit organizing as either a stock or nonstock cooperative, a number limit them to agricultural producers. In a stock cooperative, members are issued stock certificates as evidence of their membership and capital investment. More than one type of stock may be issued.

Capital Certificates

Capital certificates of a non-stock cooperative are the equivalent of preferred stock issued by a stock cooperative. They are sold in various denominations, may bear interest, and may or may not have a due date. They have no voting privileges and may be owned by nonmembers.

The combination of membership fees, sale of capital certificates, and capital certificates issued for retained patronage are sources of risk capital (equity) for non-stock cooperatives. (Certificates issued for retained patronage may carry a due date to implement systematic rotation.)

Common Stock

Stock cooperatives issue shares of common stock to show membership and voting rights. Common stock may be divided into classes. Each class may have different par values and carry different voting privileges. Usually, cooperatives don’t pay interest on common stock.

Membership Certificates

If the cooperative is organized as a non-stock organization, usually membership and capital certificates are insured, This certificate is issued when membership fees are paid and establishes voting rights in the cooperative. The amount of capital collected from membership fees is usually considered as incidental to capitalizing of the cooperative. Membership certificates are generally non-interest bearing.

Preferred Stock

Preferred nonvoting stock may be issued to both nonmembers and members for additional capital investment. This stock may be divided into classes. Each has different par value and/or other conditions. Interest paid on preferred stock may be limited by State statute and redemption determined by the board of directors. If the cooperative is changing structure or going out of business, preferred stock is paid before the common stock.